What is Short Selling and How Does It Work

Short selling can be an attractive strategy to profit from during market downturns – however not without some risk attached.

So, What Is Short Selling?

What does shorting a stock mean?

Well, in times of market turmoil, there are still opportunities to generate returns from stocks. The process is called short selling (or shorting shares of stock, or selling short) and should never be more than part of an overall investment strategy. In its simplest form, short selling is selling shares that you don’t own. A stockbroker will first loan you shares that you can sell. When you sell short and borrow shares, think of it as having a loan of shares that you must return at sometime in the future. Short selling is riskier because there is no limit to your losses (stocks can keep rising) as opposed to when purchasing stocks, your losses are limited to your initial investment (if the stock goes to zero).

Short Selling Example

The best way to understand short selling stocks is by looking at a concrete example of short selling explained.

Suppose you do some research and think that LUV’s (Southwest Airlines) traffic is falling and the price of oil is skyrocketing and you believe it will continue to do so for at least the short-term. You place an order to sell short 100 shares of LUV and you get filled at $10. Your broker will borrow the shares, and sell these shares for you. Your cash balance will go up by $1,000 and your market value of your stock will now go down by $1,000 (you now owe the broker 100 shares of LUV). If you’re correct – and the price of LUV starts to drop – you can then purchase that number of shares at a lower price and replace those that you “borrowed.” This is called “covering your short” and you will pocket a decent profit on the short sale. However, should you be wrong and the price of LUV increases, you may be less than pleased with this strategy as you will have to go out and buy the LUV shares at a higher price such as $12 and now you have lost the difference in prices or $200.

How To Short Sell: 10 Tips To Get You Started

1. Proceed With Caution

   This cannot be stressed enough when it comes to shorting shares of stock. When you short a stock, the potential loss is infinite as there is technically no limit to how high the stock can climb.

2. Use Stop Orders

   Learn how to start investing and learn to use stop order will help you minimize your risk and cut your losses before they get out of hand.

3. Understand How to Use Margin

   The process of short selling a stock involves borrowing the stock and therefore trading on margin. This means there are fees and interest payments involved, making the process slightly more complicated than regular stock purchases.

4. Shorting shares of stock is best used as a tool for hedging

   If used properly, short selling can be a great tool to hedge your position. This means to protect yourself against losses on other long (bought) positions.

5. Wait till you become an advanced trader with more experience

   Due to the higher risk and increased complexity of these trades, short selling is usually limited to sophisticated investors, day traders, and hedge funds.

6. Forget about the high stock price

   Don’t short simply because the stock has an expensive share price and you think it must come down. Look at how to value a stock and fundamentals that point to signs that the stock price is inflated and will reverse trend.

7. Don’t ignore the industry as a whole

   The stock you choose to short should be part of a struggling industry as well. You want the market, industry, and stock to all show weakness. If any of the three are strong, you increase your chances of picking a loser.

8. Short in bear or weak markets

   Although easier said than done, you can spot bear markets by following the market as a whole. It is in these markets when stocks are struggling to show any green, that there is profit to be made on the downfall.

9. Look at sales and profit

   This applies for both short selling and long investing. Increasing/decreasing sales and profits provide a great indication to the future direction of the stock.

10. Don’t get greedy!!

    Set a predetermined exit point. When you hit it, sell! No questions asked.

---

---

Ranking of Top Stock Newsletters Based on Last 3 Years of Stock Picks as of August 16, 2025

We are paid subscribers to dozens of stock and option newsletters. We actively track every recommendation from all of these services, calculate performance, and share our results of the top performing stock newsletters whose subscriptions fees are under $500. The main metric to look for is "Return vs SP500" which is their return above that of the S&P500. So, based on August 16, 2025 prices:

Best Stock Newsletters

Rank	Stock Newsletter	Picks Return	Return vs SP500	Picks w Profit	Max % Return	Current Promotion
1.	Alpha Picks	74.7%	51.1%	78%	969%	August, 2025 Promotion: Save $50
Summary: 2 picks/month based on Seeking Alpha's Quant Rating; Retail Price is $499/yr. See complete details and analysis in our Alpha Picks Review.
2.	Moby.co	52.5%	18.1%	73%	2,406%	August, 2025 Promotion:Next pick free!
Summary: 60-150 stock picks per year, segmented by industry; Retail Price is $199/yr. Read our Moby Review.
3.	Zacks Top 10	33.0%	15.1%	73%	170%	August, 2025 Promotion:$1, then $495/yr
Summary: 10-25 stock picks per year based on Zacks' Quant Rating; Retail Price is $495/yr. Read our Zacks Review.
4.	TipRanks SmartInvestor	18.6%	7.6%	65%	386%	Current Promotion: Save $180
Summary: About 1 pick/week focusing on short term trades; Lifetime average return of 355% vs S&P500's 149% since 2015. Retail Price is $379/yr. Read our TipRanks Review.
5.	Stock Advisor	41.7%	6.1%	76%	299%	August, 2025 Promotion: Get $100 Off
Summary: 2 picks/month and 2 Best Buy Stocks lists focusing on high growth potential stocks over 5 years; Retail Price is $199/yr. Read our Motley Fool Review.
6.	Action Alerts Plus	25.9%	4.9%	65%	210%	Current Promotion: None
Summary: 100-150 trades per year, lots of buying and selling and short-term trades. Read our Jim Cramer Review.
7.	Rule Breakers	35.6%	1.2%	78%	273%	Current Promotion: Save $200
Summary: 2 picks/month focusing on disruptive technology and business models; Lifetime average return of 355% vs S&P500's 149% since 2005; Now part of Motley Fool Epic. Read our Motley Fool Epic Review.
8.	Zacks Home Run Investor	3.5%	-1.3%	44%	200%	August, 2025 Promotion:$1, then $495/yr
Summary: 40-50 stock picks per year based on Zacks' Quant Rating; Retail Price is $495/yr. Read our Zacks Review.
9.	IBD Leaderboard ETF	11.4%	-1.8%	n/a	n/a	August, 2025 Promotion:Save $129/yr
Summary: Maintains top 50 stocks to invest in based on IBD algorithm; Retail Price is $495/yr. Read our Investors Business Daily.
10.	Stock Advisor Canada	23.5%	-4.6%	69%	378%	August, 2025 Promotion: Save $100
Summary: 1 pick/month from the Toronto stock exchange; Retail Price is CD$199/yr. Read our Motley Fool Canada Stock Advisor Review.
Top Ranking Stock Newsletters based on their 2024, 2023, 2022 stock picks' performance as compared to S&P500. S&P500's return is based on average return of S&P500 from date each stock pick is released. NOTE: To get these results you must buy equal dollar amounts of each pick on the date the stock pick is released. Investor Business Daily Top 50 based on performance of FFTY ETF. Performance as of August 16, 2025.

-->